News 2020 change programme launched to ensure STV remains the best news service in Scotland while delivering significant cost savings

Creation of a dedicated digital division to drive growth and deliver a personalised STV for everyone

First content partnership announced to increase the scale of STV Player; ad-free subscription version of the STV Player to launch to access pay revenues for the first time

STV Productions to create a formats unit focusing exclusively on returnable series and the nations & regions opportunity; new MD recruitment process well underway

Launch of £5m advertising Growth Fund to maximise STV’s share of the advertising market and help drive the Scottish economy

New investments to be funded entirely by cost savings; STV to consult with shareholders on improving the effectiveness of the current capital return

Progressive dividend to be further enhanced to 20p per share in 2018, +18% on 2017

Strong start to 2018 continues with total advertising expected to be up 6% in H1: national advertising +2%, regional and digital revenues both +20 to 25% and STV Productions +30%.

STV today announces a comprehensive new 3-year growth strategy aiming to establish the integrated producer-broadcaster as Scotland’s home of news and entertainment. The new strategy will bring changes to STV’s management, culture and organisation and will be delivered through 3 strategic objectives:

Maximising the value of STV’s broadcast business by delivering high quality, cost-effective news and entertainment;

Driving digital growth through the STV Player by creating an STV for Everyone;

Building STV Productions into a world-class independent production company.

A new organisational structure will mirror the 3 objectives, creating 3 distinct divisions across Broadcast, Digital and Production, each with its own Managing Director, P&L and KPIs. Bobby Hain will be Managing Director of Broadcast while recruitment processes are underway for the other two MDs who will be part of a new, leaner management team focused on delivering the strategy.

Maximising our Broadcast business

STV’s Broadcast business remains strong and is likely to outperform the ITV Network due to a favourable deal with ITV which insulates STV from both declines in the national advertising market and increases in the ITV programme budget;

Reflecting the challenging economics of local television and anticipated new competition from BBC Scotland, our loss-making STV2 channel will close at the end of June 2018, with content investment shifting to the STV main channel and STV Player. This will result in savings of £1m per annum and a headcount reduction of 25;

We have launched a comprehensive change programme in news – STV News 2020 - which will bring investment in skills, technology and digital, as well as reinforcing our reputation as the best news service in Scotland, while delivering savings of £1m per year and a headcount reduction of 34. We are recruiting a new Head of News to lead this transformation;

We will use these cost savings plus other redirected content spend to allocate £15m for new investments over the next 3 years - the majority of which will be spent on new original content, with a focus on formats and returnable series;

This new programming will be made by STV Productions and showcased on the STV main channel, making the best of our producer-broadcaster status and our unique Channel 3 “shop window” in Scotland;

In partnership with advertisers we are also launching the STV Growth Fund, investing £5m of TV airtime to support Scottish businesses, grow future advertising budgets and drive the Scottish economy.

Driving digital growth

We are placing digital front and centre in the organisation by creating a dedicated digital team under a new Managing Director whose sole focus will be to drive the growth of our online streaming service, STV Player;

STV Player is already the fastest-growing PSB VOD service with proportionately the largest registered user base (over 60% of all adults in Scotland) and is converting these advantages into strong, profitable growth;

We will focus on a number of revenue-driving priorities: improving reliability, introducing new features and personalisation, enhanced advertising, wider distribution and a richer content proposition;

We will dedicate a proportion of our new content investment to STV Player exclusive programming, targeting younger audiences with short and long-form content;

We will aggregate other leading content brands within the STV Player, broadening our content proposition and enhancing our VOD advertising sell. Our first premium content partner will be Hopster, the award-winning pre-school kids’ TV app whose service will be integrated and promoted within STV Player in an innovative new deal;

We will also launch an ad-free subscription version of STV Player for Scots at home and abroad, tapping into the burgeoning market for subscription VOD services and accessing pay revenues for the first time.

Building a world-class independent production company

Our aim is for STV Productions to become one of the UK’s leading production companies, with bases in Glasgow and London;

Under new leadership, we will reposition and rebrand STV Productions to focus exclusively on developing returning series for both terrestrial and SVOD players;

We will establish flexible creative partnerships with producers, writers and IP owners to attract the best talent and expand STV’s creative pipeline;

We will create a new formats unit where new programme ideas for the UK and international markets are piloted on the STV main channel, exploiting STV’s unique producer-broadcaster status;

We will also create a dedicated digital unit focusing on the development of formats and short-form content for younger audiences on and off STV.

Outlook and guidance

Our 2018 performance continues to be strong across all areas. On screen, STV has had its strongest start to a year since 2009, with peak time viewing share at 21.7% January to April, 0.7 share points (or 3%) ahead of ITV. Online viewing is also up 29%;

National advertising revenue is expected to be up 2% in H1, regional and digital advertising revenues are expected to be up 20 to 25% over the same period, resulting in total advertising growth of 6% in H1. STV Productions has already secured 30% more revenue in 2018 than for the full year 2017;

We are allocating £15m for investment in new content, creative partnerships and the STV Player over the next 3 years. This will be funded entirely by cost savings from news and STV2, as well as redirected C3 programming cost. We expect the return on this investment to come from a mix of C3 sponsorship revenue, increased VOD advertising revenue, and higher production and secondary sales revenues;

We expect to incur reorganisation costs of around £5m, of which £2 to 3m will be cash, covered by funds originally earmarked for the buyback programme. We will also be consulting with shareholders on options to improve the effectiveness of the existing capital return.

As a sign of our confidence in the underlying business, the Board is proposing to further accelerate the dividend, increasing the proposed full year dividend in 2018 by a further 2p to 20p, +18% on 2017;

The new organisational structure will create 3 profitable business divisions where costs are allocated in line with viewer consumption. We will report in this new format from our Interim results in September;

We expect to move to a position whereby around one third of our profit base (measured as non-broadcast EBIT under the new 3 division structure) is derived from non-television advertising sources within 3 years.

Simon Pitts, STV Chief Executive, said:

“This is a positive vision for STV that will re-establish the company as a creative force in Scotland and beyond. We will invest in creative talent, new original programming and digital to ensure STV becomes Scotland’s home of news and entertainment and delivers long-term value for advertisers, shareholders and viewers alike.

Our de-risked broadcast business is resilient and provides the engine room for STV’s growth. We will use our unique marketing platform to showcase new formats from STV Productions, drive viewing to STV Player and get even closer to advertisers through the launch of our new Growth Fund for Scottish business.

News is fundamental to the STV brand and we remain committed to offering the best news service in Scotland. However, given how quickly news consumption is changing it is vital that STV evolves to stay competitive, and we are therefore launching a comprehensive change programme - STV News 2020 - that will see us invest in skills, technology and digital as well as delivering cost savings.

As a result of the challenging economics of local television and anticipated increased competition from BBC Scotland, we have taken the difficult decision to close our loss-making STV2 channel to focus our future content investment on STV and the STV Player. I’d like to thank the STV2 team for everything they have achieved over the last 4 years.

We have ambitious growth plans for STV Productions which is well placed to take advantage of the surge in demand for new programming from the Nations and Regions. We will exploit STV’s unique producer-broadcaster status to attract the best creative talent and showcase new formats and ideas for the UK and international markets.

The STV of 2020 will have creativity as its heart, working in partnership to drive the Scottish economy and showcase Scotland to the world.”

Despite changing viewing habits, TV still dominates video viewing, accounting for over 80% of all viewing. In Scotland TV viewing levels are also 10% higher than the UK average;

Within that, the public service channels (including STV) still account for the vast majority of viewing, while smaller digital channels are largely in decline as VOD viewing continues to grow;

While there is structural pressure on TV advertising, there is no cliff edge. TV’s share of total UK advertising has stayed constant for the last 15 years at around 25%, with evidence showing that it is getting more not less effective;

One reason for this is that broadcasters have developed new on demand platforms that work in tandem with live TV and make it bigger, delivering high-quality video inventory across platforms. Google and Facebook have the volume but broadcasters have the quality, and one is not a substitute for the other. That’s why broadcaster VOD attracts premium pricing, in contrast to Google and Facebook;

Television news has undergone a fundamental shift in consumption, with more news watched online and via social media than on television. More under 55s browse STV news online than watch our regular bulletins;

There has never been a better time to be a producer of high-quality television programming, with more buyers than ever. STV Productions’ addressable market is set to grow by over £200m per annum over the next 3 years to £2.2bn, driven by the global SVOD players and a significant increase in “nations & regions” spend by C4 and BBC in particular.

APPENDIX 2

Restatement of new Broadcast and Digital divisions with existing divisions